The issue that arises is to determine whether Preference dividend falls under the definition of dividend u/s 2(22). DDT u/s 115-O shall be deducted only when the dividend distributed falls u/s 2(22). In case preference dividend is not covered u/s 2(22), TDS u/s 194 is required to be deducted.
1. Attention is to be given to sec 115BBDA. An extract of the said section provides that
“Notwithstanding anything contained in this Act, where the total income of a specified assessee, resident in India, includes any income in aggregate exceeding ten lakh rupees, by way of dividends declared, distributed or paid by a domestic company or companies, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding ten lakh rupees, at the rate of ten per cent; and
(b) the amount of income-tax with which the assessee would have been chargeable had the total income of the assessee been reduced by the amount of income by way of dividends.
Explanation.—For the purposes of this section,—
(a) “dividend” shall have the meaning assigned to it in clause (22) of section 2 but shall not include sub-clause (e) thereof;”
2. From the perspective of the holders of Preference shares, it shall be noted that preference dividend received in excess of 10 lakhs is taxed at the rate of 10%. 115BBDA applies only when the dividend is in the nature of sec 2(22). Since 115BBDA is made applicable to preference shareholders receiving dividend in excess of 10 lakhs, it shall be drawn that preference dividend is squarely covered u/s 2(22).
Section 194- Extract
“The principal officer of an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends (including dividends on preference shares) within India, shall, before making any payment in cash or before issuing any cheque or warrant in respect of any dividend or before making any distribution or payment to a shareholder, who is resident in India, of any dividend within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2, deduct from the amount of such dividend, income-tax at the rates in force :
Provided also that no such deduction shall be made in respect of any dividends referred to in section 115-O.”
Since 115-O is applicable also for Preference dividend, DDT has to be deducted. Incase DDT has been rightly deducted, TDS u/s 194 is not required to be deducted at the time of payment of Preference dividend.
The above article is based on the authors private view. The author shall not be responsible for any extracts or references made.